Shifting new MSERS employees to individual retirement accounts has “improved political incentives” and reduced taxpayer risk, according to author

MIDLAND — The 1997 reform that switched new state
employees in the Michigan State Employees’ Retirement System from a
defined-benefit to a defined-contribution plan has saved Michigan taxpayers an
estimated $2.3 billion to $4.3 billion in unfunded state employee pension
liability between 1997 and 2010, according to a new Policy Brief from the Mackinac
Center for Public Policy. In the brief, “Estimated Savings From Michigan’s 1997
State Employee Pension Plan Reform,” Mackinac Center Adjunct Scholar Rick
Dreyfuss analyzes the impact of the 1997 pension change and concludes the
reform also saved taxpayers an additional $167 million in pension “normal
costs.”

“Taxpayers’ savings from this seminal reform are
significant and multifaceted,” said Dreyfuss, who also authored a 2010 Mackinac
Center Policy Brief comparing state employee retirement systems to those of
Michigan’s private sector. “Closing state employees’ traditional pension plan
to new employees and placing them in a defined-contribution plan with
individual retirement accounts was considered a dramatic step when the
legislation was passed in December 1996. But a comparison of the performance of
the two plans since then suggests the decision was sound. The reduction in
taxpayer costs and risks has not only lightened a considerable burden on the
state budget, but also improved Michigan’s long-term economic outlook, making
the state more attractive to new business and investment than it would have
been otherwise.”

The traditional state employee pension plan carried
an unfunded liability of $4.1 billion at the end of fiscal 2010. Dreyfuss
notes that this unfunded liability almost certainly would have been higher if
new employees had continued to enter the plan after 1997. To calculate savings
from the reform, Dreyfuss uses data from the Michigan Office of Retirement
Services, the Michigan Senate Fiscal Agency and the state’s financial reports
for the system. He estimates that if the plan had remained open, taxpayers would
have been responsible for between $2.3 billion and $4.3 billion in additional
unfunded liability as of 2010, the latest year for which data are available.

Using the same data, Dreyfuss also compares the
annual “normal” cost of benefits provided to state employees under the
traditional defined-benefit system to the annual cost of benefits provided by
the defined-contribution system. He estimates that from 1997 through 2010, the
lower cost of the defined-contribution plan has saved the state $167 million.

Dreyfuss stresses that the pension reform “has
improved legislative political incentives.” With a defined-contribution plan,
he notes, there can be no unfunded liability, and there are fewer political
opportunities to increase pension benefits whose costs are deferred until
later, a process that is currently occurring with the state employees’
traditional pension plan. “The Legislature’s management of the traditional plan
has unfortunately placed a tax burden on a future generation that is currently
too young to vote — something the defined-contribution plan does not do,”
Dreyfuss observed. “Given the plan’s structure and history, the 1997 reform has
been a victory for taxpayers and a model for future reforms.”